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10.07.08

The Money Trail

Rahm Emanuel is catching heat for his payday at Freddie Mac, one of the originators of the meltdown. It's a reminder that the pols condemning the bonus payouts were themselves handsomely rewarded while failing to blow the whistle on the money men.

Rahm Emanuel is catching heat for his payday at Freddie Mac, one of the originators of the meltdown. It's a reminder that the pols condemning the bonus handouts were themselves handsomely rewarded while failing to blow the whistle on the money men.

As the finger-pointing ramps up worldwide about the causes of the financial meltdown, one of the major culprits is clear: the reckless priming of the mortgage market by Freddie Mac and Fannie Mae, both government-sponsored enterprises.

Since at least 2003, there have been numerous efforts to put Fannie and Freddie on a tighter leash. Each was defeated, in large part by Democrats—many of them major recipients of campaign contributions from Fannie and Freddie. In the accompanying
media gallery, The Daily Beast documents in detail the main enablers in Congress—and the money their campaigns were paid through Freddie and Fannie’s political action committees and various affiliates. The top takers of Fannie and Freddie’s campaign money were three Democratic senators:

The chairman of the Senate Banking Committee, Chris Dodd ($165,400)

Presidential front-runner Barack Obama ($126,349)

John Kerry ($111,000)

John McCain, a campaigner for tighter regulation, received no money from the political action committees, but executives contributed $21,550. Democratic vice presidential candidate Joe Biden received one of the smallest contributions, $3,300.

The Beast’s gallery of enablers identifies the main opponents of strong reform and what key figures among them said about the agencies at the time.

The Democrats’ goal of widening home ownership to low-income groups and minorities was socially desirable—and economically disastrous. At the first downturn in the housing market, in large part due to high-risk mortgages provided through Fannie Mae and Freddie Mac, the companies did not have enough liquidity to continue without a government bailout.

Perhaps the biggest blunder the agencies made was to borrow $1.4 trillion at privileged low rates (because of their quasi-government status) and use the money to earn higher interest on high-risk bundles of securitized mortgages repurchased from banks.

Spurred by successive accounting scandals in which both Fannie and Freddie overstated earnings, legislators embarked on ultimately unsuccessful attempts to tighten regulation on the government-sponsored enterprises. In 2003, the Bush administration proposed to create two agencies to take over supervision of both Freddie and Fannie.

Freddie and Fannie roared on, buying up high-risk securitized mortgages. Fannie’s CEO, Franklin Raines, and his executives had an incentive to do this. The greater the volume of business they did, the higher their compensation.

Republican senators backed the idea. The chief advocates in the Senate were Chuck Hagel, Republican of Nebraska, backed by presidential candidate John McCain, Republican of Arizona, Elizabeth Dole, Republican of North Carolina, John Sununu, Republican of New Hampshire, and Richard Shelby, Republican of Alabama. Senator Jon Corzine, Democrat of New Jersey, introduced related but separate legislation. Both bills failed.

In 2005, a bill in the House to regulate some aspects of Freddie and Fannie was passed overwhelmingly. Rep. Paul Ryan, Republican of Wisconsin, an ardent reformer, explained in a Beast interview that he voted for it because he and his allies hoped it could be turned into more of a tiger in a House-Senate conference. The tactic proved fruitless. It never reached the floor of the Senate.

Some who resisted stronger controls on Fannie and Freddie complained that those who supported tightening were more interested in tilting the playing field toward the private mortgage industry than protecting consumers. Former Rep. Michael Oxley, Republican of Ohio, blamed the Bush administration for scuttling hopes of a compromise by insisting on tighter regulations.

“What did we get from the White House? We got a one-finger salute,” Oxley bluntly told the Financial Times last month.

A spokeswoman for Senator Tim Johnson, Democrat of South Dakota, Julianne Fisher, said Johnson would have signed on to a bill similar to the one in the House, but ultimately could not support the Senate bill.

“You don’t always have to re-create the wheel on a bill that passed the House with 331 votes,” Fisher said in a Beast interview. “To blame the Democrats on the committee who wanted something similar to the House is laughable.”

Freddie and Fannie roared on, buying up high-risk securitized mortgages. Fannie’s CEO, Franklin Raines (a former Clinton budget director) and his executives had an incentive to do this. They changed their own pay procedures so the greater the volume of business they did, the higher their compensation.

Raines, who accepted early retirement in December 2004, was subsequently accused by the Office of Federal Housing Enterprise and Oversight of overstating Fannie’s earnings by $6.3 billion. (He was paid $20 million in 2003 alone.) In a settlement, Raines and two executives agreed to fines totaling about $31 million, and Raines returned stock options worth around $15 million. Fannie paid a record fine of $400 million.

The McCain campaign has suggested that Raines had been asked to advise Barack Obama on housing and mortgage matters. A Washington Post investigation concluded: “If we are to believe Raines, he did have a couple of telephone conversations with someone in the Obama campaign. But that hardly makes him an adviser to the candidate himself—and certainly not in the way depicted in the McCain video release.”

By the time 2008 rolled around and a law regulating Fannie and Freddie passed, the mortgage industry was already on the verge of collapse. Only months later, the government took over Fannie and Freddie outright.

The Beast has also compiled a
list of the top 100 recipients of campaign donations from Freddie and Fannie (PDF) and their votes on the 2005 House bill, though charting the course of regulation efforts is complicated by political maneuvers such as the “mouse-tiger ploy,” through which members of Congress accept a weak version of a bill with the hope that it will be given more teeth down the road.